Obamacare’s Options: Medicaid Expansion in the States

One outcome of the Supreme Court’s June 2012 health care ruling is that the federal government cannot force states to expand Medicaid. And yet, as of last week, 24 states have volunteered to do so.

What is driving some states to expand a program that is a perennial source of budgetary pressure? In a new paper, Mercatus Center scholar and Social Security/Medicare Trustee Charles Blahous analyzes the factors facing state officials. These include budgetary circumstances, the structure of the Medicaid program and how it is affected by the provisions of the Affordable Care Act (ACA), and other subjective judgements at work.

Historically, the federal government has covered an average of 57% of the cost of the Medicaid program in the states. ACA changes this. The federal government is now offering to cover the entire cost for a subset of new Medicaid recipients for three years. That subset is childless adults with incomes up to 138% of the Federal Povery Level (FPL). Gradually by 2020, federal support for the newly eligible will drop to 90%.

As Blahous notes, the Court took away ACA’s “stick” to force Medicaid expansion but it left a federal “carrot” that pays for the states’ expanded coverage. For a brief time, the states feel no pain for expanding Medicaid eligibility for this specific population.

Regardless of whether states expand Medicaid or not, Medicaid costs have been squeezing state budgets for some time due to increased medical costs and caseloads. On average, the program represents nearly one-quarter of state budgets, and this is projected to rise by 150% in the next decade.

If state officials are prudent they will bank on the federal government yanking that carrot away in the near future, and covering even less of the costs for the newly eligible.

When the court struck down the Medicaid expansion mandate, it also changed how the health exchanges operate. States now face a variety of incentives depending on their circumstances.

States have an incentive to decline Medicaid coverage for newly eligible childless adults between 100% to 138% of the FPL. Declining to cover the newly eligible minimizes states’ exposure to rising costs in the future after the federal Medicaid subsidy dwindles. Those adults can be put into the (more generous) exchanges and have their health coverage subsidized by the federal government.

States have a weak incentive to cover newly eligible childless adults with incomes below 100% of the FPL. Although these individuals will be fully subsidized by the federal government (at least, in the short-run), a countervailing consideration for states is ACA’s drive to enroll individuals who are currently eligible for Medicaid (e.g., pregnant women, parents of young children) but aren’t signed up. This is the “woodwork effect,” which, starting in 2014, will draw out the “eligible-yet-uncovered” and put them in the existing Medicaid program raising the cost of the program for the states.

The budgetary effects of the “woodwork effect” vary depending on demographics and federal Medicaid-matching rates in individual states.

So why are 24 states jumping on the expansion bandwagon? It’s a short-term bet.The federal government will carry the cost for a few years for Medicaid eligibility expansion. But in the medium-to-long term, states face the certainty of rising costs for increased enrollments and caseloads, and a federal government dragging under the weight of unprecendented levels of entitlement spending.